Marketing Report 1 st Half 200 9

1. Marketing Report 1st Half 2009 Overview of Credit Risk Management practices – The banking perspective Sofia December 2, 2010

2. Overview of Credit Risk Management practices in banks Basic concepts of the credit risk management • Credit Risk is the current or prospective risk to earnings and capital, arising from an obligor’s failure to meet its obligations in accordance with the agreed terms • Goal of CRM: maximization of the bank’s risk adjusted rate of return by maintaining credit risk exposure within acceptable parameters • CRM refers to the credit risk in individual credits or transactions as well as the risk inherent in the entire portfolio • Consideration of the relationship between credit risk and other risks • The CRM approach used by individual banks should correspond to the scope and sophistication of the bank’s activities

3. Lines of defence in the credit risk management process First line is considered Business origination units (business units). They are obliged to follow strictly the principles and rules defined in the Lending Rules and Credit Policy of the bank and to assess the credit risk in a manner of keeping the interests of the Bank. Second line is considered Credit Risk units (decision takers with credit approval competences). They are responsible for the precise and in depth assessment and approval of credit risks to different customer types of borrowers and the adherence to the approved Credit Policy of the bank. Third line is considered the Risk management unit. It is responsible for identification of treats against the overall credit portfolio, i.e. monitoring of existing credit risks within the portfolio and identification of potential credit risks that could evolve. Main principals for credit riskmanagement

4. Set objectives and responsibilities Set credit risk guidelines Collect credit data Credit risk process & credit risk management Allocate provisions; capital charges Monitor credit performance Make credit decisions Measure and assess credit risk

5. Best practices in credit risk management in the following areas Establishing an appropriate credit risk environment Operating under a sound credit granting process Maintaining an appropriate credit administration, measurement and monitoring process Ensuring adequate controls over credit risk Role of bank supervisors in ensuring that banks have an effective system in place to identify, measure, monitor and control credit risk Broad principles of credit risk management in Banks

6. Purpose of the credit and source of repayment; Current risk profile (incl. the nature and aggregate amounts of risks) of the borrower or counterparty and its sensitivity to economic and market developments; Borrower’s repayment history and current capacity to repay, based on the historical trends in its financials and future cash flow projections, under various scenarios; customer’s capacity to increase its level of indebtedness; The proposed terms and conditions of the credit, including covenants designed to limit changes in the future risk profile of the borrower; Proposed collateral types, LTV, adequacy and enforceability of collaterals or guarantees, under various scenarios; Integrity and reputation of the borrower or counterparty. Important factors for credit approval

7. Internal factors  Financial risk Assessment of the existing financial position Assessment of the expected financial position Accounting quality  Business risk Market position Operating Efficiency  Management risk Management business expertise Payment record External factors  Conditions in the respective economic sector of activity  Economic trends in the industry of activity Specific factors for credit approval for business customers

8. Expert judgment Based on assessment of factors like: the features of the credit facility, the capital position (incl. capital structure) of the applicant, its repayment capacity, the collateralization, the economic conditions and the business cycle on the respective market Credit rating systems Capture all relevant information about the borrower and assign a grade through a risk rating process, by the consideration of financial and non-financial factors Limits system Prudential regulations for single borrowers/related parties, risk class/rating linked exposures, industry level caps, delegation of powers Credit risk assessment tools

9. Rating represents the default probability Role in approval process depends on the risk appetite (minimum rating criterion)  capital allocation (pricing) Role in monitoring, analysis and reporting indicates the quality of the exposure at a given moment of time  should be linked to the periodicity of the asset review process  early warning system  capture asset quality migrations  product pricing (Risk Return trade-offs)  provisioning and capital requirements Administration  Loan review/monitoring  Trigger Actions (i.e. planning credit enhancement, reduction in exposures, exitstrategy) Roles of Credit ratings

10. Quantitative approach for credit risk measurement Borrower risk Facility risk related Probability of default (%) Loss given default Exposure at default Expected loss X X =

11. Portfolio Management • scenario analysis • risk based exposure limits • Rating based pricing • default rate, recovery rate • expected loss charge, capital charge Rating system Usage of Credit Ratings

12. Credit risks are managed at the level of the Obligor Group Concentration Risk, as part of credit risk, includes:  large (connected) individual exposures and  significant exposures to groups of counterparties whose likelihood of default is driven by common underlying factors, e.g. economic sector (industry), geographical location, currency, credit risk mitigation techniques (including, for example, risks associated with large indirect credit exposures to a single collateral issuer) Approaches to Credit Risk Management